Service charges in commercial property RICS/SCSI/IPFMA code of practice. Irish edition

Transcription

1 Service charges in commercial property RICS/SCSI/IPFMA code of practice Irish edition

2 Service charges in commercial property SCSI/RICS code of practice Irish edition Produced by Members of the SCSI Property and Facilities Management Professional Group for the Society of Chartered Surveyors Ireland Members of the Irish Property and Facilities Management Association (IPFMA) Members of the Commercial Property Professional Group of the Royal Institution of Chartered Surveyors Members of the Association of Shopping Centre Managers (ASCM) No responsibility for loss or damage caused to any person acting or refraining from actions as a result of the material included in this publication can be accepted by the authors or SCSI & RICS. First edition published 2007 Published July 2013 Society of Chartered Surveyors Ireland (SCSI) and the Royal Institution of Chartered Surveyors (RICS) July Copyright in all or part of this publication rests with the SCSI and RICS save by prior consent of SCSI or RICS, no part or parts shall be reproduced by any means electronic, mechanical, photocopying or otherwise, now known or to be advised.

3 Service charges in commercial property SCSI/RICS/IPFMA code of practice 1 Service charges in commercial property RICS/SCSI/IPFMA code of practice Irish edition

4 2 Service charges in commercial property SCSI/RICS/IPFMA code of practice Contents Foreward & Acknowledgements 4 SCSI/IPFMA guidance notes 5 The service charge arrangement 6 Use of this Code of practice 6 Section 1: The Code 7 Service Charge Code ( The Code ) 8 Aims and objectives 8 The Core Principles 8 Limitations of the Code 9 Section 2: Recommended best practice to 11 support the core principles 1 Administration Standard and quality of service provision Staffing and personnel Management charges Total cost of management Management fees Duties of the manager Site management costs Notional rent for management 14 accommodation 1.4 Contract procurement Service standards and provision Procurement of services Allocation and apportionment transparency Schedules Flexibility Void and unlet premises The apportionment matrix Floor area apportionment Rateable value apportionments Owner s cost/profit centres Tenant alterations Direct recoveries Insurance Utilities 17 2 Communication and consultation Communication Consultation Budgeting and cost review 18 Dealing with new and existing leases Existing leases New leases Sweeper clauses 19 4 Financial controls and competencies Accounting principles Audit and certification of service charges The requirements of the lease Service charge certification Auditing of the service charge accounts Independent accountant report Recommended best practice Standard industry cost classifications Budgets and actual expenditure accounting Right to challenge Change of owner or manager On-account payments Interest on service charge accounts Forward funding of service charge costs Timeliness Benchmarking and cost analysis Value for money 25 5 Dispute resolution Alternative dispute resolution as industry 26 best practice Early neutral evaluation Mediation Independent expert determination Arbitration RICS DRS fact sheets 28 6 Mixed use schemes 29

5 Service charges in commercial property SCSI/RICS/IPFMA code of practice 3 7 Provision for anticipated 30 future expenditure 8 Initial provision, replacement and 31 improvement of fabric, plant and equipment 8.1 Initial provision of fabric, plant and equipment Like-for-like replacement Replacement with enhancement Improvement and enhancement Refurbishment Communication 32 9 Environmental sustainability Additional best practice guidance for 34 shopping centres 10.1 Marketing and promotions Commercialisation (non-core income) Apportionment of service charges in 35 shopping centre weighted floor area Section 3: Appendices 36 A Best practice compliance checklist 38 B Standard Industry Cost Classifications 39 C Example reports 44 D Revenue Commissioners form on 60 VAT concessions Section 4: Additional information 71 1 Glossary and terminology 72 2 Further reading 75

6 4 Service charges in commercial property SCSI/RICS/IPFMA code of practice Foreword The Society of Chartered Surveyors Ireland in conjunction with the Irish Property and Facility Management Association and the Association of Shopping Centre Mangers Irish Region introduces to you the second edition of the SCSI Code of Practice for Service Charges in Commercial Property. The first edition of the Code set down a marker as to the standards of management required in commercial property and this new edition builds on that. The core principles behind the previous edition of the Code namely communication, transparency and timeliness remain key in the 2013 Code. Without doubt, awareness of the need for better management among managers, owners and occupiers has been heightened by the Code and the efforts of all the pan-industry bodies in promoting it. There is evidence, albeit anecdotal, that the Code has led to improvements in the standards of management being achieved in much of the commercial property sector. Increased engagement with the legal profession is a key aspiration of the new Code. Whilst the Code cannot override leases we expect that as leases are renewed or new leases are granted that they are drafted to reflect what is seen as best practice and espoused by the Code. The Code recognises occupiers must have a right of challenge. It is recommended that in the future all leases will contain Alternative Dispute Resolution (ADR) clauses that allow the parties to cost effectively settle disputes in service charge matters. Without doubt if the property industry is to deliver on its key objective of transparency enabling owners, managers and their customers to be aware of how service charge costs are derived then an independent and substantially larger benchmarking service will be the next step in this process. The previous Code introduced Industry Standard Cost Classifications. The adoption of these is recommended as a must in service charges going forward. Similarly the use of independent accountants certificates (rather than audits) is introduced for the first time. The Code is in a clearer format. The core principles are set out at the start of the Code with guidance and supporting information provided thereafter. We believe this will be simpler to follow and easier for parties to adopt and comply with. Whether owner, occupier or manager, the Code creates a framework of Best Practice and we commend this second edition to you all. Acknowledgements With special thanks to the RICS working group and also the SCSI / IPFMA Service Charge Working Group: Jerome O Connor, DTZ Sherry FitzGerald, Dublin Siobhan O Dwyer,O Dwyer Property Management, Dublin Seán Aylward, Nutgrove Shopping Centre, Dublin Roy Deller, Savills, Dublin Tara Giles, Bannon Commercial, Dublin Ronan Rooney, Cosgrave Property Group, Dublin John Brophy, Fairgreen Shopping Centre, Carlow

7 Service charges in commercial property SCSI/RICS/IPFMA code of practice 5 SCSI/IPFMA guidance notes This Code of practice has the status of a guidance note. It provides advice to practitioners. Where procedures are recommended for specific professional tasks, these are intended to embody best practice. Although practitioners are not required to follow the advice and recommendations contained in the note, they should note the following points. When an allegation of professional negligence is made against a practitioner, the court is likely to take account of the contents of any relevant guidance notes in deciding whether or not the practitioner had acted with reasonable competence. A practitioner conforming to the practices recommended in this note is unlikely to be adjudged negligent on account of having followed these practices. However, practitioners have the responsibility of deciding when it is appropriate to follow the guidance. If it is followed in an appropriate case, the practitioner will not be exonerated merely because the recommendations were found in a guidance note. On the other hand, it does not follow that a practitioner will be adjudged negligent if he or she has not followed the practices recommended in this note. It is for each individual practitioner to decide on the appropriate procedure to follow in any professional task. However, where practitioners depart from the practice recommended in this note, they should do so only for good reason. In the event of litigation, the court may require them to explain why they decided not to adopt the recommended practice. The Code has been prepared to promote best practice in terms of service charges for commercial properties in new leases or renewed leases. Circumstances can arise where the suggested best practice in this Code cannot be applied. This Code therefore should not compel owners, occupiers or managers to an inappropriate course of action. Transparency simply requires that in the event the Code is inappropriate the reasons for this are shared with all relevant parties and a record kept. In addition, guidance notes are relevant to professional competence in that each practitioner should be up to date and should have informed him or herself of guidance notes within a reasonable time of their coming into effect. In the opinion of the approving professional bodies, this guidance note represents best practice. Effective Date The Service Charges in Commercial Property Code of Practice and supporting guidance are effective from 1 July 2013.

8 6 Service charges in commercial property SCSI/RICS/IPFMA code of practice Introduction The service charge arrangement Service charges enable an owner to recover the costs of servicing and operating a property from the occupiers and others that benefit from and use the services and facilities provided. The service charge arrangement is set down in the lease(s) and the aim is to entitle the owner to recover his charges and associated administrative costs incurred in the operational management of the property. This will include reasonable costs of maintenance, repair and replacement (usually where beyond economic repair) of the fabric, plant, equipment and materials necessary for the property s operation plus any other works and services which the parties agree are to be provided by the owner and subject to reimbursement by the occupier. If the property is fully let, the owner will normally be able to recover all expenditure on services through the service charge, except any concessionary discounts the owner has given. Usually there will be a manager who administers these services (for which he/she will receive a fee). Service charge costs will not include: Any initial costs (including the cost of leasing of equipment) incurred in relation to the original design and construction of the fabric, plant or equipment. Any setting up costs, including costs of fitting out and equipping the on-site management offices that are reasonably to be considered part of the original development cost of the property. Improvement costs above the costs of normal maintenance, repair or replacement. Service charge costs may include enhancement of the fabric, plant or equipment where such expenditure can be justified following the analysis of reasonable options and alternatives and having regard to a cost benefit analysis over the term of the occupiers leases. Managers should provide the facts and figures to support and vindicate such a decision. Future redevelopment costs. Such costs which are matters between the owner and an individual occupier, for instance: enforcement of covenants and collection of rents; costs of letting units; consents for assignments; sub-letting; alterations; rent reviews; additional opening hours etc. Any costs arising out of the failure/negligence of the manager or owner. Use of this Code of practice Section 1 of this document outlines the aims and objectives of this Code, along with stating its core principles. Section 2 then gives recommendations and guidance on how the Code can be followed. Sections 3 and 4 contain additional information and resources to support your understanding of the Code and assist you with the implementation.

9 Section 1: The Code

10 8 Service charges in commercial property SCSI/RICS/IPFMA code of practice Service Charge Code ( The Code ) Aims and objectives Allocation and apportionments To improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property. To ensure timely issue of budgets and year end certificates. To reduce the causes of disputes and to give guidance to resolving disputes where these do occur. To provide guidance to solicitors, their clients (be they owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases in accordance with best practice. The core principles Tenants who agree to service charge clauses under which they contract to pay against a surveyor s estimate or an accountant s certificate rely upon the professional people involved performing their roles with professional scrupulousness, diligence, integrity and independence and not in a partisan spirit, supposing their only task to be to recover as much money as they can for the landlord. Jonathan Gaunt QC sitting as a Deputy High Court Judge: Princes House Ltd v Distinctive Clubs Ltd [2006] The service costs 1 Best practice requires services to be procured on an appropriate value for money basis and that competitive quotations are obtained or that cost are benchmarked. 2 Owners should not profit from the provision or supply of services. Save for charging a reasonable commercial management fee to reflect the actual costs of managing the services the amount recoverable by an owner is limited only to the proper and actual cost incurred in the provision or supply of services. 3 All costs are to be transparent so that all parties, owners, occupiers and managers, are aware of how the costs are made up. Management fees are to be on a fixed price basis with no hidden mark ups. 4 Costs should be allocated to the relevant expenditure category. Where reasonable and appropriate, costs should be allocated to separate schedules and the costs apportioned to those who benefit from those services. 5 The basis and method of apportionment should be demonstrably fair and reasonable to ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure that reflects the availability, benefit and use of services. 6 Managers are to make a full apportionment matrix available to all occupiers, which clearly shows the basis of calculation and the total apportionment per schedule for each unit within the property/complex. Certification 7 Certified accounts of expenditure are to represent a true and accurate record of expenditure incurred. Those certifying service charge accounts must recognise that they have a duty of care to both owners and occupiers to act with professional care, diligence integrity and objectivity. Communication and consultation 8 Whilst the owner has the right to set the standard to which his investment will be managed and has a duty to manage, managers will consult with occupiers with regard to the standard and quality of service charge provision required. 9 Managers will communicate with occupiers to ensure services are delivered effectively for the benefit of all and to ensure that occupiers understand what they can expect to receive and how much they are required to pay. 10 Managers claiming compliance with the principles of this Code will be transparent in demonstrating how they comply. An example is to use the checklist at appendix A. Duty of care 11 The owner and/or manager has a duty to manage the property and also has a duty of care to occupiers, (who entrust the spending of their own business overhead and cash flow by funding the services) and to the owners, (whose investment they are servicing).

11 Service charges in commercial property SCSI/RICS/IPFMA code of practice 9 12 There will be clear policies as to how the service charge will be managed. Financial competence 13 In incurring costs in the provision of services, the manager is spending the occupiers money. Managers must demonstrate a high degree of competence, professionalism, integrity, diligence, objectivity and transparency in dealing with the service charge accounts. 14 When issuing statements of accounts and/or certifying expenditure managers must do so in a non-partisan spirit, acting as experts. The manager must therefore ensure that all costs have been incurred and are properly recoverable in accordance with the leases. 15 Service charge monies will be held in one or more discrete bank accounts, recognising that monies are held to deliver the service expenditure. 16 All interest earned, or where separate accounts per property are not operated a proper and reasonable amount of interest calculated on normal commercial rates, will be credited to the service charge account after appropriate deductions have been made, i.e. bank charges, tax, etc. 17 The recommended Industry Standard Cost Headings must be used in reporting budget and actual expenditure. Occupier responsibilities 18 Occupiers will ensure prompt payment of all service charge on-account and balancing charges. Where a legitimate dispute exists, any payment properly withheld should reflect only the actual sums in dispute. 19 Occupiers will recognise that the service charge provision of any lease has legal effect and will ensure that representatives involved in discussions, meetings etc. have an appropriate level of responsibility and authority to make decisions concerning service charge matters. 20 In recognition that value for money and maintenance of quality standards will be enhanced through partnership, occupiers will be proactive in assisting owners in the operation and utilisation of service and service systems, e.g. separating waste to facilitate appropriate and cost effective recycling, adopting energy saving measures, etc. Right to challenge/dispute resolution 21 All new leases (including renewals) should make provision for either party to require the resolution of disagreements through the use of alternative dispute resolution (ADR) as a cost effective alternative to court action. 22 If the parties cannot agree a mediator or independent expert to determine the dispute the president of the SCSI should (on request) nominate a suitable person. Where leases do not allow for ADR parties are reminded that there is nothing to stop them agreeing to go to ADR to resolve a dispute. Timeliness 23 Communication and consultation between managers and occupiers need to be timely and regular to encourage and promote good working relationships and understanding with regard to the provision, relevance, cost and quality of services. 24 Managers will issue budgets to occupiers, including an explanatory commentary at least one month prior to the start of the service charge year. Detailed statements of actual expenditure, together with accounting policies and explanatory text, will be issued within four months of the service charge year end. Transparency 25 Transparency is essential to achieving good communication. By being transparent in the accounts, the explanatory notes, policies and day to day management the manager will prevent disputes. Prompt notification of material variances to plans or forecasts ensures better relationships between owner, manager and occupier. Value for money 26 Service quality is to be appropriate to the location, use and character of the property. The manager is to procure quality service standards to ensure that value for money is achieved at all times. The aim is to achieve value for money and effective service rather than lowest price. Limitations of the Code Existing lease terms This Code cannot override the lease but, if read in conjunction with it, will enable users to identify the best way forward in interpreting that lease to ensure effective management of services.

12 10 Service charges in commercial property SCSI/RICS/IPFMA code of practice As business practice constantly evolves, so it is with service charges. Negotiating a new lease or the renewal of an existing lease provides an ideal opportunity to ensure modern and flexible best practice service charge clauses are incorporated within the lease contract to facilitate effective management of the property and the relationship between the parties. An ADR clause will enable difficulties during the term of the lease to be resolved efficiently. The parties should carefully consider the principles and requirements of this Code prior to entering into a new or renewal lease. Proportionality The extent to which owners and managers should seek to comply with the recommended best practice processes and procedures set down in this code will often be dependent upon a variety of issues such as the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers and should be consistent with best value principles. Nevertheless, owners, managers and occupiers should at all times seek to comply with the core principles set down in this Code.

13 Section 2: Recommended best practice to support the core principles

14 12 Service charges in commercial property SCSI/RICS/IPFMA code of practice 1 Administration 1.1 Standard and quality of service provision The aim of service provision is to ensure services are beneficial and relevant to the needs of the property, its owner, its occupiers and their customers. Managers and occupiers should consider the nature, type and complexity of each property as the levels and standards of service provided will differ according to these factors. In providing these services the aim is to achieve value for money and effective service rather than lowest price. The manager is responsible for ensuring that the standards of services provided are monitored, that the quality and cost of the services provided are regularly reviewed and, where possible, demonstrate that service standards are being delivered and value for money is being obtained. Management policies and procedures are to be established that define the procurement, administration and management of services, and to ensure the respective obligations of owner and occupier are discharged and services are provided efficiently, economically, cost effectively and safely. Where there are sound reasons for implementing alternative procedures to the ones set out in the Code the manager should be able to explain and justify these in advance. Effective communication is key to achieving best practice; the aim being to provide transparency between manager and occupier in the way services are provided and managed and how the costs of these services are recovered. On occasion there will be additional services provided outside the service charge. Occupiers are entitled to expect similar transparency, accountability, etc. in these services. The Code applies to these as well. 1.2 Staffing and personnel On-site management staff should have a sound knowledge of appropriate modern business practices and be adequately skilled to provide best and agreed performance standards. They will need appropriate skills in general management, employment and health and safety matters and necessary training costs may be covered by the service charge. To ensure the services are provided efficiently and cost effectively sufficient staffing of the right type and calibre are to be provided. The total costs for staff should be declared. Site management teams and managers should be required to perform according to defined performance standards. It is advisable to measure and review performance regularly against these performance standards. Where reviews of staffing levels are undertaken it is reasonable that costs associated with achieving beneficial change, such as termination of employment contracts, will be recovered under the service charge provided such costs can be justified following the analysis of reasonable options and the purpose is to achieve greater value for money and cost effectiveness. 1.3 Management charges Total cost of management The management charge is the reasonable price for the total cost of managing the provision of the services at the location, and relates only to work carried out in managing and operating the services and administering the service charge. The management charge might comprise two elements: the fee charged by the manager for the management and supervision of the services to a site (the management fee) the cost of site specific management staff, whether based on-site full time or part time (the site management costs). No two buildings are identical in the way they need to be run to meet the requirements of all parties with an interest in the property. Management fees and the site management costs will need to be set at the appropriate level with this in mind and the management structure in place should meet the requirements of the building and of this Code. It is not for this Code to prescribe the operating business model of the manager. However, best practice requires transparency and a management structure where costs are clearly identified and explained within the explanatory notes included in the budget and actual expenditure reports to occupiers.

15 Service charges in commercial property SCSI/RICS/IPFMA code of practice Management fees The management fees charged should be a reasonable costs and overheads in relation to the operation and management of the services. This should reflect the work necessary to fulfil the principles of this Code. It is recognised that whoever is providing the service is entitled to cover their costs and overheads including a reasonable profit element. The manager should ensure that the management fee relates only to the work carried out in managing the service charge. Other costs, i.e. asset management and rent collection should be excluded from the service charge management fee. The service charge report should state this fact. The Code requires that fees are set on a fixed price basis rather than being calculated as a percentage of expenditure. Percentage is no longer appropriate and is considered to be a disincentive to the delivery of value for money. The management fee should be a fixed fee subject to annual review or indexation. It is recognised that many leases refer to the management fee as a percentage of the total service charge or contain a percentage cap. This guide cannot override the terms agreed between the parties and recorded in the lease. However, where the lease limits the amount or quantum of the fee recoverable from occupiers it is a matter between the owner and occupier and should not prevent or limit the manager s ability to charge a commercial fee which reflects the requirements of this Code. In certain circumstances this may result in a shortfall in the recovery of service charge costs on behalf of the owner but the overriding principle must be to achieve best practice principles for the management and administration of services charges in commercial property. Managers should confirm in the service charge report: the basis of their appointment; when they were appointed; and the basis of the management fee payable, which is recoverable under the service charge. Where the owner manages the property in-house they should be able to support the basis of their fees when benchmarked against other comparable service providers. It is advisable for the costs of reports undertaken by specialists working for the same organisation as the manager (i.e. fire risk assessment, DDA reports, health and safety reports) to be excluded from the management fee; and for any fees for these additional services to be stated clearly and represent value for money. If other costs of providing the management service are being included as separate items, the management fee should reflect this separate accounting as part of the management service. Further detailed information and guidance is available in an RICS information paper: Limiting liability in property management contracts. This publication refers to UK practice but would be a useful guideline provided the reader interprets it with local practice Duties of the manager Items 11 and 12 of the core principles outline duty of care responsibilities relating to service charges. The owner has the duty to manage or delegate management of the property and the responsibility to administer and account for the tax properly due on the service charge that ownership brings. Best practice requires the manager to recognise a duty of care to occupiers, who fund the services being provided, and the owners whose investment they are servicing. The manager will usually perform additional roles and duties relating to investment interests, i.e. asset management and rent collection. In such cases the fees charged by the manager in relation to the performance of such additional duties is to be excluded from the service charge management fee Site management costs Site management costs will be the full employment costs for sufficient staff, as described in 1.2. The job titles of the staff will vary. The total cost of the staff will include wages, PRSI, tax, compliance with statutory requirements, training and other appropriate benefits. Site management costs might also include: the costs of providing appropriate office accommodation and administrative support where necessary; and/or a fee representing the HR and payroll costs associated with dealing with staff (often referred to as an administration charge); separate specialist consultancy fees payable, For instance, in connection with the carrying out of health and safety risk assessments, asbestos surveys, etc. and which should be clearly identified in the service charge accounts. One way of ensuring the costs reflect value for money is to compare them to a third party providing similar services.

16 14 Service charges in commercial property SCSI/RICS/IPFMA code of practice Where such fees are included the basis of calculation and/or quantum of the fees included should be clearly communicated to occupiers to aid transparency. Where on-site staffs oversee more than one property, their costs (and any appropriate accommodation and administrative support costs) should be adjusted accordingly so each property picks up a fair share of their cost. The service charge report should identify if this is the case and how costs are split. Many buildings require management 24 hours a day, 7 days a week. A manager may consider supporting the function of the on-site staff by providing a customer support/help desk to deal with property matters outside of usual business hours or when the manager cannot be contacted. Where this is provided as an alternative to employing additional on-site staff, the reasonable cost of running this service may be recovered from the service charge Notional rent for management accommodation Many leases contain provisions for the inclusion of a notional rent within the service charge for management accommodation or other premises used in connection with the management of the property. Notional rents were originally included to provide developers with a return on otherwise unlettable space and to cover the initial provision costs for management accommodation. In many cases, management accommodation cannot be separately let and thus has no market value, other than as a location for such an operation. However, there are situations where the management premises comprise accommodation (e.g. offices) that would otherwise be lettable space; in these cases, there is an element of rent foregone to provide accommodation for the on-site management team. It is generally not advisable to charge occupiers notional rent in situations either where the premises are incapable of beneficial occupation for any other purpose, or where provision has not been made for facilities management accommodation; for example, a modern building designed without including facilities management accommodation as part of the original design specification. There is also an argument that the receipt of a notional rent acts as a disincentive to the efficient use of space and the consideration of alternative uses for areas occupied for centre or facilities management. 1.4 Contract procurement Service standards and provision It is advisable to ensure that all contractors and suppliers perform according to written performance standards. It can prove valuable to regularly measure and review performance against these defined performance standards; as well as regularly reviewing the appropriateness of the standards used Procurement of services It is the responsibility of the manager to identify the procurement strategy suitable for the property based on appropriate level of service and value for money. The manager may use a procurement specialist to deliver best value solutions so long as the purpose is to achieve greater value for money and cost effectiveness. The cost of any procurement specialists employed is considered to be a cost that is recoverable through the service charge but the costs should be clearly identified in the charge report, along with details of whether it is a one-off fee or spread over the length of the contract. The fee payable should reflect the work undertaken and may be performance related. It is the responsibility of the manager, or procurement specialist, to develop procurement systems; vet and select the most appropriate contractors based on track record, skill and management; and prepare a contract and specification (including Transfer of Undertakings (Protection Employment) (TUPE) information where appropriate). Contract costs should be transparent and in accordance with the provisions for transparent accounting. Further information can be obtained from the RICS information paper: TUPE: information for property managers. The manager or procurement specialist should be responsible for the provision of full pre-qualification assessments of suppliers and contractors in terms of their financial standing; proven compliance with health and safety; appropriate indemnity in respect of the services provided, including an undertaking through sub-contractors (with provisions for prior approval thereof) and proven environmental/ sustainability credentials. Managers should ensure that there is transparency in procurement fees and charges for verifying contractor financial

17 Service charges in commercial property SCSI/RICS/IPFMA code of practice 15 standing, health and safety records and environmental credentials etc., including cost or fees charged to owners. If any fees are received from contractors managers should clearly state what these are. Managers should also be aware that the practice of requesting fees from contractors for inclusion in approved contractor lists, contract tendering etc. is contrary to best practice and is considered to be wholly inappropriate under any circumstances. Upon receipt of tenders, a tender report should be prepared containing recommendations on which contractor is most suitable. Copies of all tender documents should be made available for inspection, if requested. Should copies be required the manager will be entitled to charge for the time, cost of copying and postage of such documents. Owners and/or managers are often able to achieve substantial savings and other benefits in the provision of services through bulk purchasing or through the placing of group contracts. However, the pricing of services under such contracts can differ in either providing a single contract sum, a separate cost per property or a schedule of rates for different services. Where such bulk or group contracts exist occupiers are not entitled to have access to documents relating to properties other than the one they occupy, although where the contract/tender includes other properties there should be transparency in terms of the apportionment and allocation of costs to the subject property. Where contracts are reviewed it is reasonable that costs associated with achieving beneficial change, such as termination of contracts, are recovered under the service charge where such costs can be justified following the analysis of reasonable options and the purpose is to achieve greater value for money and cost effectiveness. 1.5 Allocation and Apportionment Transparency Schedules Costs should be apportioned to each occupier in accordance with items 4 and 5 of the core principles. The basis and method of allocating and apportioning the service charge expenditure is to be transparent and clearly communicated to all. Any inducements or concessions to attract occupiers to a property are to be borne by the owner and not spread among other occupiers. The rationale for the apportionment between occupiers should be set down in writing and re-examined periodically to see whether there is a need for a new apportionment matrix or apportionment method to be applied. Where reasonable and appropriate, costs should be allocated to separate schedules and the costs apportioned to those who benefit from those services. In many cases, particularly buildings with a variety of different users, not all the occupiers will benefit from the services to the same extent. In such circumstances it may be necessary to divide the service charges into separate parts (schedules) to reflect the availability, benefit and use of services with each part being individually apportioned between occupiers according to the core principles. The allocation of costs to separate schedules is essential in achieving a fair and proper apportionment of costs between those occupiers that benefit from specific services. Occupiers will therefore often pay different percentage apportionments under different schedules Flexibility It is worth considering that the availability, benefit and use of the services within a building, and the demand for those services by individual users, could vary over time; and therefore leases would benefit from being drafted to include flexibility and variation. For example, additional units may be created or the use of a property may change causing different demands for services, and thus changing the costs/payments structure. Even with the grant of shorter-term leases the ability to change allocation and apportionment methods, where necessary and appropriate, should be available during the term to ensure service charges are spread fairly and reasonably between all the beneficiaries and users Void and unlet premises Occupiers are not to be liable for the costs attributed to unlet premises; the owner is to meet the cost of these, as well as any special or personal concessions given to individual occupiers. Owners are also responsible for bearing a fair proportion of costs attributable to their use of the property, e.g. where an on-site management premises are also used for other purposes unconnected with the day-to-day management of the building and services.

18 16 Service charges in commercial property SCSI/RICS/IPFMA code of practice The apportionment matrix Managers are to make a full apportionment matrix available to all occupiers, which clearly shows the basis and method of calculation and the total apportionment per schedule for each unit within the property/complex. For the avoidance of doubt and to preserve confidentiality this should exclude details of any individual concessions or other arrangements between individual owners and occupiers, which are costs that are to be borne by the owner. An individual occupier should be able to clearly verify the basis and method of calculation used in arriving at his or her particular percentage apportionment Floor area apportionment Apportionment based on floor area is the most common and often the simplest method of apportionment. The standard floor area apportionment is the ratio the premises bear to the total lettable parts of the building. The SCSI Code of measuring practice sets out definitions of the measurement of buildings and their recommended applications, e.g. Gross External Area (GEA), Gross Internal Area (GIA) Net Internal Area (NIA) etc. Where the service charge is apportioned based on floor area, managers should ensure that the method of measurement used is consistent. Do not mix different measuring methods in the same schedule Rateable value apportionments Rateable values are no longer recommended as an appropriate method for calculating service charge apportionments. Rateable values take account of a variety of factors relating to value, such as location etc. and do not generally reflect a reasonable assessment of the benefit and use of common services. While many leases require service charges to be apportioned based on rateable value with no provision for any alternative basis to be used, and notwithstanding that this Code cannot override the contractual terms of any lease, it is nevertheless the view of the steering group that rateable value apportionments should be changed to such other recognised methods of apportionment consistent with the aims and aspirations as set down on this Code Owner s cost/profit centres Where there is a separate cost or profit centre within a property complex that generates income for the owner, which is not credited to the service charge account, the costs associated with maintaining and running that cost centre will not be allocated to the service charge account (e.g. car parks, mobile phone masts, advertising, radio aerials, etc.). If the separate cost/profit centre derives benefit from staff or services that form part of the service charge then the cost/profit centre will be incorporated into the service charge matrix (e.g. car park, management office, etc.). Alternatively, owners can estimate and declare a contribution to the service charge to reflect the benefit and use of the common services enjoyed Tenant alterations Alterations carried out by tenants may have an impact upon or affect the calculation of the apportionment of occupier service charge liabilities. When dealing with alteration to premises, particularly where these require the prior consent or approval of the owners, careful consideration should always be given to the potential impact upon the calculation of the service charge to ensure that the apportionment continues to be fair and reasonable. Further information and guidance can be obtained from RICS information paper: Apportionment of service charges and tenant alterations. 1.6 Direct recoveries Service charges usually include the cost of utilities for any common parts and services. Traditionally buildings and/or rent insurance is apportioned to occupiers outside of the service charge arrangement as a directly recoverable cost, with occupiers often being responsible for payment of electricity/gas consumption supplied to the occupied premises direct to the utilities provider. In some circumstances, however, the lease may provide for the cost of buildings insurance and demised electricity to be recovered within the service charge. Where owners are seeking to recover the cost of insurance and utilities outside of the service charge arrangement, occupiers are entitled to expect similar transparency, accountability, etc. in these services. The Code applies to these as well.

19 Service charges in commercial property SCSI/RICS/IPFMA code of practice Insurance Value for money Where owners are responsible for insuring the property the insurance policy terms should be fair and reasonable and represent value for money, and be placed with reputable insurers. Commission The principle of commission retention is now long established. In its base form the use of commission to cover administrative costs including broker fees should be recognised and also the owner s ability to benefit from the economies of scale generated by the pooling of risks into a common programme. Owners and managers must always disclose any commission they are receiving. Service Owners should provide full insurance details on request. Owners should also explain the process by which occupiers can make claims under the policy. Policies should include the ability to note the interest of occupiers and include subrogation waiver and noninvalidation provisions to the benefit of the occupier, again in line with lease obligations. Further information and guidance can be obtained from the RICS guidance note: Insurance for commercial property managers Utilities Where a service is provided direct to an occupier or the occupied premises, such as mains water or electricity supply, as distinct common works and services, it is important that the manager and occupier understand the basis on which the service is provided and whether the costs are intended to be included within the service charge account or as a separate charge. Separate metering or full sub-metering of utility supplies is considered essential to ensure an apportionment of cost between occupiers that reflects actual consumption and usage. Costs should be recovered in accordance with the terms of the leases, which ought to allow additionally for the payment of a reasonable administrative charge. The recovery should state unit costs and admin charges and include copies of the original invoice in order to comply with the requirements for transparency set out in this Code. To avoid ambiguity and to ensure accurate consumption and billing is recorded for occupiers it is recommended best practice that the cost of reading meters (where carried out by a third party) is included as an acceptable cost under the service charge. Otherwise, such cost would usually comprise part of the on-site management costs. Occupiers should be aware of the ever-increasing pressure placed on owners by utility providers for prompt payment and should therefore ensure that all invoices are paid promptly. In certain circumstances payments in advance may be appropriate. It is now becoming increasingly common for utility companies to request that owners either pay large security deposits or higher energy rates. Where a lease makes specific provision for inclusion of a security deposit as a service charge cost, both owners and occupiers should ensure that the lease allows for the occupier s proportion of such deposit to be reimbursed upon expiry or sooner determination of the lease, in the event of a change of owner/manager, or if the deposit is otherwise reimbursed by the utility company. Where a lease makes no such provision, it is considered appropriate for the owners to open a dialogue with occupiers to seek to agree to pay a security deposit in return for contract supply rates, as opposed to default supply rates. The payment of a deposit can be included in on- account payments for the relevant service charge period, credited at the year end and then re- budgeted for the following period. Therefore, if a lease expires in any given period the occupier will receive an appropriate credit in their final service charge balance.

20 18 Service charges in commercial property SCSI/RICS/IPFMA code of practice 2 Communication and Consultation 2.1 Communication Poor communication often gives rise to disputes. Effective communication is key to achieving best practice the aim being to provide transparency between manager and occupier in the way services are provided and managed and how the costs of these services are recovered. Communication needs to be timely and continuous and works best when managers and occupiers deal with each other s reasonable enquiries and reciprocal obligations promptly and efficiently. Managers should seek feedback from occupiers on the performance management standards and service delivery and action this as appropriate. It is important to have clear communication structure. Best practice requires managers to hold regular meetings with occupiers; and occupiers have a duty of care to participate and to be proactive in informing managers of the key contacts who deal with service charges. Managers are also to make key contacts information available to occupiers, i.e. management surveyor, credit controller, accounts clerk etc., and the names of on-site staff along with their roles and responsibilities. Managers are to provide occupiers with a copy of the management policy, which should contain standard information about how the property is managed and the aims of the management team (manager and site team). Managers should also inform occupiers of any future plans for the property, if these have an impact on the service charge. 2.2 Consultation Managers of residential premises are required to follow statutory consultation procedures and will be keenly aware that if the proper procedure is not followed the amount that they can recover might be limited. It is the manager s duty to keep expenditure under constant review in order to identify any unforeseen variances and to notify occupiers accordingly. When significant variances in actual costs against budget are likely, it is good practice for the manager to notify occupiers promptly and within the current service charge year. When substantial works are planned, summary details of the results of tenders and the process used should be communicated to the occupiers together with full information on the programme of works, costs and the process to be adopted for keeping occupiers informed. Occupiers are entrusting their business overheads/ operating costs to an external manager and are entitled to be notified of any significant or material variances to the forecast as soon as possible. Whether a variance against forecast is to be regarded as significant or material will often be a subjective assessment, dependent upon a variety of issues such as the size, nature and type of property and the amounts payable by individual occupiers. Prompt notification of unforeseen variances in the total annual spend should be made to all occupiers with an explanation as to how this is being mitigated at the earliest opportunity. 2.3 Budgeting and cost review Managers of commercial property are not generally obliged to consult with occupiers prior to incurring costs that are ultimately to be recovered under the service charge arrangement. However, some commercial leases might set out certain procedures to be followed, perhaps prior to incurring large extraordinary costs such a major fabric or plant replacements, etc. The courts have recently ruled in a number of instances that owners must strictly follow the terms of leases when recovering service charges. In order to ensure recovery of the service charge managers should pay particular care to follow the procedures set down within the lease. Even where the lease is silent it is considered best practice that managers consult with occupiers with regard to the standard and quality of service charge provision required. Whilst the manager has a duty to manage the property and will not wish to avoid expenditure which might have a detrimental effect on the owner s investment, managers should ensure that the standard of service provision (and therefore the cost to occupiers) does not unnecessarily exceed the reasonable requirements and needs of the occupiers.